STIFEL FINANCIAL CORP.
Exhibit 99.3 Pro Forma Financial Statements
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except par values and share amounts)
The following unaudited pro forma combined financial statements give effect to the acquisition by Stifel Financial Corp. ("Stifel") of substantially all of Legg Mason Inc.'s ("Legg Mason") capital markets business ("LMCM") from Citigroup, Inc. on December 1, 2005. Under the terms of the agreement, Stifel paid Citigroup, Inc. an amount equal to the net book value of certain assets being acquired, primarily fixed assets and securities inventories, plus a premium of $7.0 million paid in cash at closing with the balance of up to an additional $30.0 million in potential earn-out payment by Stifel to Citigroup, Inc., based on the performance of the combined capital markets business of both Stifel's pre-closing Fixed Income and Equity Capital Markets business and Legg Mason Capital Markets for calendar years 2006, 2007, and 2008. In addition, Stifel made a $45.9 million payment directly to Legg Mason for the securities inventory associated with the LMCM acquired by Stifel.
On January 2, 2006, Stifel granted 1,807,510 restricted stock units to key associates of the LMCM. The units were granted with a measurement price of $37.59 per unit. The unitsprimarilyvest ratably over a three-year period and accordingly Stifel will incur an annual non-cash compensation charge of approximately $23.0 million.
On January 23, 2006, Stifel completed a private placement of 1,052,220 shares of its common stock at $25.00 per share. The shares were purchased by key associates of the LMCM. Stifel was required to charge to compensation the difference between the $25.00 per share and the fair value of $34.27 per share. As a result, Stifel incurred a non-cash compensation charge of approximately $9.8 million in the quarter ended March 31, 2006.
The unaudited pro forma combined statement of financial condition presents the combined financial position of Stifel and LMCM as of September 30, 2005, as if the transactions had occurred as of that date. The pro forma statement of financial condition is based on the historical statement of financial conditions of Stifel and LMCM as of September 30, 2005. The unaudited pro forma combined statements of operations are presented for the twelve months ended December 31, 2004 and the nine months ended September 30, 2005 as if the transactions had occurred at the beginning of each of those periods. The unaudited pro forma combined statement of operations for the year ended December 31, 2004 combines the historical statement of operations of Stifel for the twelve months then ended and the historical statements of operations of LMCM for the year ended March 31, 2005. The unaudited pro forma combined statement of operations for the nine months ended September 30, 2005 combines the historical statements of operations of Stifel and LMCM for the nine months then ended. For the three-month period ended March 31, 2005, LMCM's total revenues and net income were approximately $68.7 million and $9.1 million, respectively, and are included in the year ended March 31, 2005 and the nine months ended September 30, 2005 pro forma financial statements.
The acquisition of LMCM was completed on December 1, 2005. As of the date of this document, Stifel has estimated the fair values of the assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair values of the net assets of LMCM acquired has been reflected as goodwill.
The pro forma financial statements also reflect adjustments to conform accounting policies of the acquired entities to Stifel's policies and reclassification of certain items to conform the presentation of the financial information.
The actual effect of these transactions upon Stifel's financial statements may differ from that reflected in these unaudited pro forma combined financial statements as a result of (i) resolution of the net assets acquired and (ii) final resolution of contingent consideration for these acquisitions. Stifel has determined that the forgoing will not likely result in material changes.
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The unaudited pro forma combined financial statements are provided for informational purposes only and are not necessarily indicative of the financial position or results of operations had the transactions occurred on the dates specified above, nor are they indicative of any results of operations or financial position that may occur in the future. The pro forma combined financial statements do not include integration costs, other than other transactions or events that the combined entity may undertake or experience as a result of the acquisition. As such, changes in revenue or expense levels, or cost savings, are not presented in the pro forma combined financial statements. These unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and notes thereto of Stifel and LMCM. The unaudited pro forma financial statements should be read in conjunction with those historical financial statements and notes thereto.
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Section 9. Financial Statements and Exhibits
Item 9.01(b). Pro forma financial information
Stifel Financial Corp.
Unaudited Pro Forma Combined STATEMENT OF fINANCIAL CONDITION
September 30, 2005
(In thousands)
Historical
Stifel FinancialCorp. | Legg MasonCapital Markets | Adjustments | Pro FormaCombined | ||
ASSETS | |||||
Cash and cash equivalents | $ 34,326 | $ 12,644 | $ (44) | a | $ 53,154 |
(20,078) | c | ||||
26,306 | d | ||||
Cash segregated under federal and other regulations | 6 | - - | - - | 6 | |
Receivable from brokers and dealers: | |||||
Securities failed to deliver | 281 | - - | - - | 281 | |
Deposits paid for securities borrowed | 21,130 | - - | - - | 21,130 | |
Clearing organizations | 6,935 | - - | - - | 6,935 | |
| 28,346 | - - | - - | 28,346 | |
Receivable from customers, net of allowance for doubtful receivables | 252,082 | - - | - - | 252,082 | |
Securities owned, at fair value | 32,623 | 140,068 | (70,843) | b | 101,848 |
Securities owned and pledged, at fair value | 204 | - - | - - | 204 | |
| 32,827 | 140,068 | (70,843) | 102,052 | |
Investments | 35,012 | 5,991 | (5,991) | a | 35,012 |
Memberships in exchanges | 275 | - - | - - | 275 | |
Office equipment and leasehold improvements, at cost,net of allowances for depreciation and amortization | 10,271 | 3,235 | (1,256) | a | 12,250 |
Goodwill | 3,310 | - - | 10,255 | c | 13,565 |
Loans and advances to investment executives and other employees, net of allowance for doubtful receivables from former employees | 19,067 | - - | 150 | a | 19,217 |
Deferred tax asset | 9,009 | - - | - - | 9,009 | |
Other assets | 23,494 | 91,259 | (84,244) | a | 64,815 |
34,306 | c | ||||
Total Assets | $ 448,025 | $ 253,197 | $ (111,439) | $ 589,783 |
See Notes to Unaudited Pro Forma Combined Financial Statements
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Stifel Financial Corp.
Unaudited Pro Forma Combined STATEMENT OF fINANCIAL CONDITION (continued)
September 30, 2005
(In thousands, except par values and share amounts)
Historical
Stifel FinancialCorp. | Legg MasonCapital Markets | Adjustments | Pro Forma Combined | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
Liabilities | |||||
Drafts Payable | $ 19,726 | $ - - | $ - - | $ 19,726 | |
Short-term borrowings from banks | - - | - - | 45,860 | e | 45,860 |
Payable to brokers and dealers: | |||||
Securities failed to receive | 5,919 | - - | - - | 5,919 | |
Deposits received from securities loaned | 36,008 | - - | - - | 36,008 | |
Clearing organizations | 2,857 | - - | - - | 2,857 | |
| 44,784 | - - | - - | 44,784 | |
Payable to customers | 85,961 | - - | - - | 85,961 | |
Securities sold, but not yet purchased, at fair value | 8,067 | 129,719 | (129,719) | a | 31,432 |
23,365 | b | ||||
Accrued employee compensation | 26,001 | 11,811 | (11,768) | a | 66,809 |
36,575 | c | ||||
4,190 | d | ||||
Accounts payable and accrued expenses | 20,201 | 3,679 | (2,544) | a | 21,336 |
Debenture to Stifel Financial Capital Trust I | 34,500 | - - | - - | 34,500 | |
Debenture to Stifel Financial Capital Trust II | 35,000 | - - | - - | 35,000 | |
Other | 24,599 | 12,441 | (9,576) | a | 27,464 |
| 298,839 | 157,650 | (43,617) | 412,872 | |
Liabilities subordinated to claims of general creditors | 2,743 | - - | - - | 2,743 | |
Stockholders' equity | |||||
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued | - - | - - | - - | - - | |
Common stock - $.15 par value; authorized 30,000,000 shares; issued 10,234,200 shares | 1,152 | - - | 142 | d | 1,294 |
Additional paid-in capital | 69,830 | 6,889 | (6,889) | a | 103,264 |
33,434 | d | ||||
Retained earnings | 81,880 | 88,658 | (88,658) | a | 76,029 |
(5,851) | d | ||||
| 152,862 | 95,547 | (67,822) | 180,587 | |
Less: | |||||
Treasury stock, at cost, 229,041 shares | 4,804 | - - | - - | 4,804 | |
Unearned employee stock ownership plan shares, at cost, 168,105 shares | 1,615 | - - | - - | 1,615 | |
Total Stockholders' Equity | 146,443 | 95,547 | (67,822) | 174,168 | |
Total Liabilities and Stockholders' Equity | $ 448,025 | $ 253,197 | $ (111,439) | $ 589,783 |
See Notes to Unaudited Pro Forma Combined Financial Statements
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Stifel Financial Corp.
Unaudited Pro Forma Combined Statement of Operations
for the Year Ended december 31, 2004
(In thousands, except per share amounts)
Historical
Stifel FinancialCorp. | Legg MasonCapital Markets | Adjustments | Pro Forma Combined | ||
REVENUES | |||||
Commissions | $ 95,692 | $ 78,771 | $ - - | $ 174,463 | |
Investment banking | 57,818 | 88,284 | (6,813) | a | 139,289 |
Principal transaction | 46,163 | 68,919 | - - | 115,082 | |
Asset management and service fees | 35,504 | - - | - - | 35,504 | |
Interest | 13,051 | 7,652 | (57) | a | 20,646 |
Other | 2,961 | 8,344 | (1,177) | a | 10,128 |
Total Revenue | 251,189 | 251,970 | (8,047) | 495,112 | |
Less: Interest expense | 4,366 | 1,947 | (48) | 6,313 | |
Net Revenues | 246,823 | 250,023 | (7,999) | 488,799 | |
NON-INTEREST EXPENSES | |||||
Employee compensation and benefits | 157,314 | 148,144 | (3,549) | a | 332,697 |
9,751 | b | ||||
22,649 | c | ||||
(1,612) | d | ||||
Occupancy and equipment rental | 21,445 | 4,736 | (138) | a | 26,043 |
Communications and office supplies | 10,330 | 13,276 | (189) | a | 23,417 |
Commissions and floor brokerage | 3,658 | 6,342 | - - | 10,000 | |
Other operating expenses | 17,459 | 30,211 | (117) | a | 47,553 |
Total Non-Interest Expenses | 210,206 | 202,709 | 11,176 | 439,710 | |
Income (Loss) Before Income Taxes | 36,617 | 47,314 | (34,794) | 49,089 | |
Provision (benefit) for income taxes | 13,469 | 19,093 | (14,085) | 18,477 | |
Net Income (Loss) | $ 23,148 | $ 28,221 | $ (20,709) | $ 30,612 | |
Earnings per share: | |||||
Basic | $ 2.39 | $ 2.70 | |||
Diluted | $ 1.88 | $ 2.20 | |||
Weighted average common | |||||
Basic | 9,702 | 11,357 | |||
Diluted | 12,281 | 13,936 |
See Notes to Unaudited Pro Forma Combined Financial Statements
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Stifel Financial Corp.
Unaudited Pro Forma Combined Statement of OPERATIONS
for the NINE MONTHS Ended SEPTEMBER 30, 2005
(In thousands, except per share amounts)
Historical
Stifel FinancialCorp. | Legg MasonCapital Markets | Adjustments | Pro Forma Combined | ||
REVENUES | |||||
Commissions | $ 74,313 | $ 59,863 | $ - - | $ 134,176 | |
Investment banking | 41,104 | 51,171 | (2,206) | a | 90,069 |
Principal transaction | 32,716 | 41,589 | - - | 74,305 | |
Asset management and service fees | 31,042 | - - | - - | 31,042 | |
Interest | 12,437 | 5,660 | (61) | a | 18,036 |
Other | 292 | 7,978 | (107) | a | 8,163 |
Total Revenue | 191,904 | 166,261 | (2,374) | 355,791 | |
Less: Interest expense | 3,887 | 1,987 | - - | 5,874 | |
Net Revenues | 188,017 | 164,274 | (2,374) | 349,917 | |
NON-INTEREST EXPENSES | |||||
Employee compensation and benefits | 124,651 | 100,611 | (1,314) | a | 249,783 |
9,751 | b | ||||
16,987 | c | ||||
(903) | d | ||||
Occupancy and equipment rental | 16,065 | 3,655 | (101) | a | 19,619 |
Communications and office supplies | 8,129 | 10,032 | (86) | a | 18,075 |
Commissions and floor brokerage | 2,784 | 4,189 | - - | 6,973 | |
Other operating expenses | 11,670 | 23,875 | (77) | a | 35,468 |
Total Non-Interest Expenses | 163,299 | 142,362 | 24,257 | 329,918 | |
Income (Loss) Before Income Taxes | 24,718 | 21,912 | (26,631) | 19,999 | |
Provision (benefit) for income taxes | 9,844 | 9,203 | (11,082) | 7,965 | |
Net Income (Loss) | $ 14,874 | $ 12,709 | $ (15,549) | $ 12,034 | |
Earnings per share: | |||||
Basic | $ 1.52 | $ 1.06 | |||
Diluted | $ 1.19 | $ 0.86 | |||
Weighted average common | |||||
Basic | 9,774 | 11,278 | |||
Diluted | 12,452 | 13,956 |
See Notes to Unaudited Pro Forma Combined Financial Statements
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Stifel Financial Corp.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
On December 1, 2005, Stifel completed the acquisition of Legg Mason Capital Markets business from Citigroup, Inc. for $19.2 million in cash (the "Transaction").
On January 2, 2006, Stifel granted 1,807,510 restricted stock units to key associates of the Legg Mason Capital Markets. The units were granted with a measurement price of $37.59 per unit. The units primarily vest ratably over a three-year period and accordingly Stifel will incur an annual non-cash compensation charge of approximately $23.0 million.
On January 23, 2006, Stifel completed a private placement of 1,052,220 shares of its common stock at $25.00 per share. The shares were purchased by key associates of the Legg Mason Capital Markets. Stifel was required to charge to compensation the difference between the $25.00 per share and the fair value of $34.27 per share. As a result, Stifel incurred a non-cash compensation charge of approximately $9.8 million in the quarter ended March 31, 2006.
The unaudited pro forma combined statement of financial condition presents the combined financial position of Stifel and Legg Mason Capital Markets as of September 30, 2005 and assumes the transactions had taken place as of that date. The unaudited pro forma combined statements of operations for the year ended December 31, 2004 present the results of operations for twelve months ended December 31, 2004 for Stifel and the twelve months ended March 31, 2005 for Legg Mason Capital Markets and assume the transactions had taken place at the beginning of those periods. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2005 combine the results of operations for the nine months then ended for Stifel and Legg Mason Capital Markets and assume the transactions had taken place at the beginning of that period. For the three-month period ended March 31, 2005, Legg Mason Capital Markets' total revenues and net income were appro ximately $68.7 million and $9.1 million, respectively, and are included in the year ended March 31, 2005 and the nine months ended September 30, 2005 pro forma financial statements.
Stifel has made certain pro forma adjustments to assets, liabilities, revenues and expenses as reported in Legg Mason Capital Markets' historical financial statements to reflect the exclusion of the Legg Mason Mortgage Capital Corp. businesses in accordance with the final terms of the transaction. This excluded business is described in Note 1 of Notes to Legg Mason Capital Markets Combined Financial Statements as of March 31, 2005, 2004, and 2003 and in Note 1 of Notes to Combined Financial Statements for the six months ended September 30, 2005 and 2004, both of which are included in this filing. The pro forma financial statements also reflect adjustments to conform accounting policies of the acquired entities to Stifel's policies and reclassification of certain items to conform the presentation of the financial statements.
The pro forma adjustments exclude the reduction of administrative allocations by Legg Mason as described in Note 3 of Notes to Legg Mason Capital Markets Combined Financial Statements as of March 31, 2005, 2004, and 2003 and in Note 3 of Notes to Combined Financial Statements for the six months ended September 30, 2005 and 2004, which, as a result of synergies of the combined operations, management believes will be significantly reduced. Refer to Note 3, Pro Forma Adjustments, for more information regarding these pro forma adjustments.
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Notes to the Unaudited Pro Forma Combined Financial Statements (continued)
Note 2. Earnings per Common Share
The pro forma combined basic and diluted earnings per share for the periods presented are based on the weighted average number of shares of common stock of Stifel during each applicable period, adjusted to give effect to restricted stock units and common shares issued in connection with the acquisitions and private placement and changes in stock-based deferred compensation arrangements that resulted from the Transaction.
The following table presents the computations of pro forma basic and diluted earnings per share:
Twelve Months EndedDecember 31, | Nine Months EndedSeptember 30, | |||||
(in thousands, except per share amounts) | Basic | Diluted | Basic | Diluted | ||
Shares: | ||||||
Weighted average common shares outstanding, as reported | 9,702 | 12,281 | 9,774 | 12,452 | ||
Shares issued in the private placement | 1,052 | 1,052 | 1,052 | 1,052 | ||
Restricted stock units | 603 | 603 | 452 | 452 | ||
Pro forma weighted average common shares outstanding | 11,357 | 13,936 | 11,278 | 13,956 | ||
Pro forma net income | $ 39,984 | $ 39,984 | $ 12,034 | $ 12,034 | ||
Pro forma earnings per share | $ 2.70 | $ 2.20 | $ 1.07 | $ 0.86 |
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Notes to the Unaudited Pro Forma Combined Financial Statements (continued)
Note 3. Pro Forma Adjustments
The pro forma combined statement of financial condition has been prepared to reflect the acquisition of Legg Mason Capital Markets by Stifel for the consideration described in Note 1. Pro forma adjustments have been made to the statement of financial condition to reflect:
| a) | An adjustment to reduce the net assets of Legg Mason Capital Markets to $12.2 million in accordance with the acquisition agreement entered into in connection with the Transaction. |
| b) | An adjustment to reduce the trading assets and trading liabilities to the value acquired in a broker-to-broker trade at December 1, 2005 in accordance with the acquisition agreement. |
| c) | An adjustment to record goodwill for the cash proceeds paid in excess of the net book value of $12.2 million in accordance with the acquisition agreement, assumption of bonus liability, capitalize certain transaction charges, and write-off certain assets acquired. |
| d) | The sale of 1,052,220 shares of common stock in a private placement to management and certain key associates of the Legg Mason Capital Markets resulting in additional common stock of $157,833 and approximately $26.1 million additional paid-in capital, net of 109,333 shares bought back for employees' withholding taxes. |
| e) | An adjustment to increase short-term bank borrowings for net trading assets purchased. |
The pro forma combined statements of operations have been prepared to reflect the acquisition of Legg Mason Capital Markets by Stifel for the consideration described in Note 1. Pro forma adjustments have been made to reflect:
| a) | An adjustment to exclude Legg Mason Mortgage Capital Corp. revenues and expenses included in the historical financial statements of Legg Mason Capital Markets in accordance with the acquisition agreement. |
| b) | An adjustment to increase the compensation and benefits to reflect the charge to compensation for the discount between the fair value and the agreed upon price for the shares purchased by key associates of Legg Mason Capital Markets. |
| c) | An adjustment to increase the compensation and benefits to reflect the granting of 1,807,510 restricted stock units to key associates of Legg Mason Capital Markets in connection with the Transaction. |
| d) | An adjustment to decrease the compensation and benefits charged for the Legg Mason stock-based compensation plans. |
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